A friend of mine asked me this since I know inentory but its more of an accounting issue and I could not answer him accurately. What kind of fraud if any would this be?
Company X and Y both sell Bolts company X has excess inventory
Company X sells a big bin of 1000 Misc Bolt X to related Company Y @ $1.00 each.
Company Y which sells some of the same thing adds the misc Bolts to inventory as the specific items they really are 243pcs bolt 1, 27pcs bolt 2, 48pcs bolt 3, etc.
Since the item came in with a cost of $1 but was converted from Misc Bolt X to specific Bolt 1 that has an actual cost of $2.
Value of company Y’s inventory increases, and dilutes the average cost of bolt 1. But company Y claims they paid $2 for it.
In doing so it makes it appear on the P&L sheet that less dollar value in inventory was used to make the same amount of money since they only paid $1 for bolts they claimed they paid $2 for on inventory value.
IMHO this has to be some kind of illegal or at best questionable accounting, any insight or links where I can read more about it?
Well, claiming they paid $2 is pretty blatent. More likely would be some fictitious ‘sorting charge’ to a nephew of the guy in charge, or something? If so, it’d be some sort of irresponsibility to shareholders - paying for something not needed is wasting their investment.
If a batch of 1,000 mixed bolts was sold in a transaction for a price of $1.00 per bolt, the purchasing company’s saying that bolt type 1 has an inventory value of $2.00 could be proper if it gave bolt type 2 an inventory value of $0.50, bolt type 3 an inventory value of $0.80, bolt type 4 an inventory value of $1.25, etc., so long as the total inventory value of the 1,000 bolts came out to $1,000.00
If the company did not price the total received inventory at $1,000 for financial reporting purposes, it would likely be improper accounting.
However, there sometimes companies use different types of inventory costing for things other than outside financial reporting. It might that for internal management costing purposes bolt type 1 is considered to have “standard” cost of $2.00, and that figure would be used for internal analyses of production profitability and overhead. It would most likely be proper in this type of management accounting for unusual intercompany transactions not to change the costing, so long as it was recorded properly for outside financial reporting purposes.